A golden goose: Online gaming industry facing sin tax trouble

digital public goods
India is a global leader in digital public goods as demonstrated in the development of Aadhar, UPI, National Digital Health Mission, and Open Government Data Platform.

By slapping a hefty 28% GST on online gaming industry, the government may deal a severe blow to the sunrise sector. In its recent report, a group of ministers had opined that horse racing, online gaming and casinos are all, in effect, avenues of betting and gambling and hence the highest tax slab of 28% tax must be levied on them.

The industry has unanimously urged the Union government and GST Council to not raise goods and service tax on online gaming as it may have catastrophic consequences for the sector. India is one of the largest markets for online gaming. The industry has paid Rs 6,000 crore in GST in the last four years and is likely to bring in revenues totalling Rs 16,000 crore between 2022 and 2025. The revenues may witness a drop if the government goes ahead with its proposal to bring the industry under 28% GST slab.

Online gaming industry cries foul

In an open letter to the government, Internet and Mobile Association of India (IAMAI) has sought to maintain status quo on GST on online gaming industry. The industry body said 28% GST is applied to products that are considered sinful consumption. The government proposal comes high on the heels of a Supreme Court order which recognised online gaming as a legitimate trade and drew a distinction between games of skill and games of chance. If the government goes ahead with slapping the highest tax slab on gaming, this will go against the spirit of the SC order, the association said.

ALSO READ: Monkeypox threat: Concerns rise as WHO sounds alarm

Currently, the online gaming industry pays a GST of 18% on gross gaming revenue (GGR) and 0% on contest entry fee (CEF). However, putting online gaming in the highest GST slab will increase the incidence of taxation to about 55%. It would increase the cost of participating in games for the majority of gamers. Further, the industry representatives are of the opinion that the decision may lead to many offline service providers to go underground which may mean revenue leakages. The last GST Council discussed the slab on online gaming in a meeting on June 29 but deferred a final decision.

A snapshot of Indian online gaming industry

There are nearly 433 million online gaming app users in the country and the number is growing rapidly. Almost half of them belong to the 15-64 age group. The pandemic was a major push to the industry which saw a 65% jump at that time. The tremendous surge in online gaming India was driven by the growing youth population, explosion in volumes of mobiles and tablets, inexpensive data, and new gaming genres offering novel thrills. 

The Indian online gaming sector is one of the fastest-growing sectors with numerous investments, enormous employment and revenue. The sector has eclipsed many other forms of media including movies, television, music, and print. According to a KPMG report, the industry is expected to generate revenue in excess of Rs 29,000 crore by 2025 with over 65 crore users, and will employ over 70,000 highly qualified technologists and many others indirectly dependent on the industry. 

ALSO READ: Why the UK India FTA is important

The industry thrived even after the pandemic fever and despite people going back to work as the pandemic subsided, the online gaming segment grew 28% in 2021 to reach Rs 10,100 crore. The same has also been the case despite regulatory uncertainties. According to experts, it is the facilitative ecosystem in India that has ensured this massive growth, coupled with the culture, creativity and relentless commitment of young game developers. 

Need for regulating the industry

Last year betting and wagering in online games had been notified by the Karnataka government. This came after high courts in Kerala and Madras had previously struck down similar bans by their respective state governments. However, the same was lifted without resolving the issues because of which the ban was imposed in the first place. Online gaming is often confused with gambling and there is a need to distinguish games of chance and games of skill and e-sports.

The Indian Judiciary too has also at times authoritatively held that fantasy sports are skill predominant and that a ‘game of skill’ is distinguishable from gambling. In fact, it also enjoys protection under Article 19(1)(g) of the Constitution. However, the sector has again and again come into a position in which it has to keep distinguishing itself from gambling.

The flourishing industry of online gaming suffers from a lack of regulatory oversight. Ambiguity in the legal regime poses a challenge for investors and a significant compliance burden for game operators. However, this is an India-only problem as foreign countries have well developed regulations for the sector. Globally, online gaming is a fairly well-regulated space and many developed countries including the UK and the US, and the EU have regulations in place to ensure that users can enjoy this form of entertainment responsibly. India also needs to bring in some regulatory framework while also taking the stakeholders in confidence.

The online gaming industry is complex in nature but it also presents a great opportunity for the government in terms of economic benefits considering the industry’s grip on the country’s youth. Experts also believe that there’s an urgent need to address the perception and uncertainty surrounding the sector to avoid extreme reactions. Apart from posing economic benefits, regulations would also ensure player safety whilst increasing the revenue and employment in the sector culminating in healthy growth of the ecosystem.

The sector becomes especially important considering that it is expected to boost the total media and entertainment industry by 4-5%.